Growth estimate upgraded

4th-quarter GDP estimate raised, but weakness persists

March 30, 2007|By Bloomberg News

WASHINGTON — The economy grew at an annual pace of 2.5 percent last quarter, hobbled by slumps in home-building and corporate spending that show few signs of abating.

The third and final estimate of gross domestic product for the period from October to December compares with the 2.2 percent reported last month and an initial calculation of 3.5 percent, the Commerce Department said Thursday.

Increases in mortgage defaults and foreclosures threaten to delay housing's recovery from its worst recession in 15 years, raising the prospect of a prolonged economic slowdown. The Federal Reserve's prediction that the economy will continue to expand at a moderate pace hinges largely on the job market and rising wages.

"There is no question growth will be slower this quarter and the next," said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Mass. "Housing is looking to be in a deeper downturn and capital spending is looking quite weak. Employment growth is enough to keep consumers spending."

The difference between the second and third estimates of growth was that inventories grew more than previously thought, suggesting production might be slow to pick up. Stockpiles subtracted 1.2 percentage points from growth, less than the 1.4 percentage points previously estimated.

Companies also tightened their purse strings. Business fixed investment, which includes spending on commercial construction as well as equipment and software, fell at an annual rate of 3.1 percent in the fourth quarter, compared with a 10 percent increase in the third. The same reluctance to invest this quarter could continue to hinder growth, economists said.

Consumer spending, which accounts for more than two-thirds of the economy, remained a bright spot. It expanded at a 4.2 percent annual pace in the fourth quarter after a 2.8 percent gain in the third. Consumer spending added 2.9 percentage points to growth.

Thursday's report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, fell 0.3 percent, to an annual rate of $1.65 trillion. Profits rose 3.9 percent in the third quarter.

"The fourth-quarter softness is overwhelmingly laid at the doorstep of the housing slowdown," said Richard DeKaser, chief economist at National City Corp. in Cleveland. "The drag will be with us all year, though not at the rates we saw last year."

Rising defaults by subprime mortgage borrowers, or those with poor or limited credit histories, are dampening prospects for a quick housing recovery. More foreclosures increase the possibility that builders and sellers will have to compete with a bigger glut of properties on the market, pushing down prices.

"Market conditions are very difficult across the country," said Stuart Miller, chief executive of Miami-based home builder Lennar Corp.